Investors were taken by surprise when the retail sales report for July showed a stronger-than-expected surge of 0.7%. This unexpected increase has raised hopes that the U.S. economy can remain resilient and avoid a recession, despite the Federal Reserve’s continuous rate hikes over the past year. However, this data has also fueled speculation that policy makers may use it to justify further rate hikes in the coming months, leading to the benchmark 10-year Treasury yield trading at its highest level since 2008.
The rise in yields typically has a negative impact on U.S. stocks, although the threshold at which this impact occurs is now uncertain, and much depends on how quickly rates rise. Interestingly, higher yields can sometimes be beneficial for risky assets. Despite the rising 10-year rate, equities managed to rally in the first half of the year. The concern now is that if the 10-year yield continues to inch above 4%, it could increase the cost of capital for small businesses and consumers, potentially destabilizing the stock market.
Strong Retail Sales Report Boosts Confidence in US Economy, Raises Concerns about Rate Hikes and Stock Market Volatility
Investors were taken by surprise with the release of a stronger-than-expected retail sales report on Tuesday, which has ignited a debate about the future direction of the US economy. The July retail sales figures showed a 0.7% surge, reinforcing the belief that the US economy can withstand the impact of the Federal Reserve’s rate hikes. However, this also provides ammunition for policymakers who are in favor of further rate hikes in the coming months. As a result, the benchmark 10-year Treasury yield reached one of its highest levels since 2008.
Rising yields have traditionally been seen as detrimental to US stocks, but the impact of higher yields on the stock market is now uncertain. The first half of this year saw equities rally even as the 10-year rate continued to rise. However, concerns are growing that if the 10-year yield rises above 4%, it will increase the cost of capital for small businesses and consumers, potentially weakening the stock market. Some experts argue that the current situation is an example of "good news being bad news," as the Treasury and equity markets were both jolted by the retail sales data.
The debate around the US economy focuses on questions about whether inflation will continue to decrease while the consumer remains in good shape, and whether monetary policy will harm the economy. Economists are also discussing what the economy will look like once monetary policy tightening is complete and interest rates start to normalize. Despite concerns about China’s economic slowdown, which had unnerved investors just a week ago, fears have subsided as the challenges facing China were already well-known. The positive retail sales report, which included a strong showing in internet purchases on Amazon Prime Day, has led economists to revise their growth forecasts for the US economy.
Following the release of the retail sales report, all three major US stock indexes opened lower on Tuesday and continued to decline throughout the day, with the Dow industrials losing over 300 points. The Federal Reserve has already implemented over five percentage points of rate hikes since March 2022, bringing its main interest-rate target to between 5.25% and 5.5%. The 10-year yield, which is used as a benchmark for various loans, briefly touched 4.27% before retracting to 4.2%. The report has also influenced the expectations for a rate hike in September, with initial pricing indicating a slightly higher chance before traders revised their predictions.
Overall, the strong retail sales growth in July has bolstered confidence in the US economy’s ability to continue growing at an impressive pace. Consumer spending, which has remained resilient throughout the year, has been a driving force behind the solid economic growth witnessed in the first half. The continuing strength of the consumer in the second half of the year is seen as a positive sign for the health of the economy and suggests that a recession is unlikely as long as consumer spending remains strong.
In conclusion, the robust retail sales report for July has provided a boost to the US economy, reinforcing the belief that it can withstand the impact of rate hikes. However, concerns have also been raised about the potential negative effects of rising yields on the stock market and the cost of capital for small businesses and consumers. The data has sparked a debate about the future direction of the economy and the impact of monetary policy. Despite initial concerns about China’s economic slowdown, the positive retail sales report has shifted focus back to the US economy. The report has influenced stock market performance and expectations for future rate hikes. Overall, the strong consumer spending suggests that the US economy is in good health and a recession is unlikely in the near future.
Short Takeaways:
- Strong retail sales report for July boosts confidence in US economy’s resilience.
- Debate sparked about the impact of rising yields on stock market and cost of capital.
- Questions raised about future direction of economy and impact of monetary policy.
- Concerns about China’s slowdown have subsided as focus shifts back to US economy.
- Positive consumer spending indicates a healthy economy with low risk of recession.
